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On the Role of a Stock Market: A Study of France, Germany, and thez Euro Area

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  • Krainer, R.
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    Abstract

    What factors cause banks to lend to the private sector in a bank-based financial system like the ones in place in Europe? In this paper we compare a traditional demand oriented model to a non-traditional capital budgeting model of bank lending based on movements in the equity cost of capital for France, Germany, and the Euro area. Using non-nested hypothesis tests and omitted variables tests we find that we can reject the traditional demand oriented model of bank lending and fail to reject the capital budgeting model of bank lending for Monetary Financial Institutions in France and the Euro area. For Germany the evidence is mixed in that both models are rejected for Monetary Financial Institutions, but only the traditional demand oriented model is rejected for the commercial bank sector. Even though Europe may be a bank-based financial system, it appears the stock market plays a key role in the lending decisions of banks.

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    Bibliographic Info

    Paper provided by Banque de France in its series Working papers with number 221.

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    Length: 34 pages
    Date of creation: 2008
    Date of revision:
    Handle: RePEc:bfr:banfra:221

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    Postal: Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS
    Web page: http://www.banque-france.fr/
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    Related research

    Keywords: Bank Loans ; Stock Market ; Non-nested Hypothesis Tests;

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